Page 419 - FM Integrated WorkBook STUDENT 2018-19

Business valuations and market efficiency

7.3 Weak form efficiency

In a weak form efficient market share prices reflect information about all past price
movements. Past movements do not help investors in identifying positive NPV
trading strategies.

Evidence

Share prices follow a random walk:

 There are no patterns or trends

 Prices rise or fall depending on whether the next piece of news is good or bad.

 Very little of a share price movement on one day can be predicted from
knowledge of the change on the previous day.

Conclusion for the stock market

 It is weak form efficient

 Future price movements cannot be predicted from past price movements.

 Chartism/technical analysis cannot help make consistent gains on the market.

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